Study Backs Dual Regulation of Life Industry

March 30, 2004

A 10-month study by researchers at the Isenberg School of Management at the University of Massachusetts Amherst finds that federal action is needed to prompt needed improvements in the regulation of the life insurance industry.

The study, “Consumer Ramifications of an Optional Federal Charter for Life Insurers,” which was supported by unrestricted grants from life insurers and the American Council of Life Insurers (ACLI), recommends that properly structured federal regulation of insurance patterned after the dual banking system could provide significant benefits to consumers. The study was released today in Washington, D.C.

“We conclude that the NAIC (The National Association of Insurance Commissioners), the nation’s principal organization of state and other insurance regulators, and state insurance commissions, are led by highly qualified professionals who are committed to protecting consumers through vigorous financial and market conduct regulation,” says Shelia Bair, the study’s author and principal investigator. Bair is the Dean’s Professor of Financial Regulatory Policy at the Isenberg School and a former assistant secretary of the U.S. Department of Treasury.

“However, our research also suggests that the current multi-state system is structurally resistant to needed reforms, even in the face of broad consensus that greater uniformity and centralization are needed in the oversight of life insurance products.”

Because of the NAIC’s lack of legal authority over individual commissions, it does not have the leverage to force agreement on uniform standards, the study says. Even if agreement could be reached, it would be up to individual state legislatures to adopt model legislation, which they seem unlikely to do, at least without adopting their own modifications.

In support of these conclusions, the study cited the following findings:

• Multiple state reviews of licensing applications and product filings are cumbersome and inefficient, which adds to regulatory costs and impedes innovation and competition.

• High workloads and sparse resources of smaller states raise concerns about the quality of filings review.

• A federal regulator could provide for a single review process, easing regulatory costs and providing greater resources for higher quality review.

• Dual chartering could strengthen the state insurance system, and reduce workloads for state commissions, while preserving premium taxes as an important source of funding for state regulation.

• Federal standards could “raise the bar” in consumer protections, and provide greater uniformity to help consumers shop and compare products.

ACLI Senior Vice President and General Counsel Gary Hughes praised Blair’s study which he said “lays out clearly that both consumers and insurers would greatly benefit from a regulatory system that provided companies a choice between state and federal regulation.”

ACLI supports a federal charter.

A former Department of Treasury official, Bair has more than 20 years experience in the field of federal regulation. The study and Bair’s complete bio can be found on line at the following url: www.som.umass.edu/bair.

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